The U.S. tax-transfer system and low-income households: Savings, labor supply, and household formation

Abstract

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The Macroeconomic Effects of Universal Basic Income Programs

“…Focusing on an equilibrium with transitional dynamics for an open economy, the author finds that the optimal NIT imposes a 22 percent marginal tax rate and a transfer of 11 percent of the GDP of the benchmark economy with an ex-ante welfare gain of 2.1 percent. Ortigueira and Siassi (2021) develop a structural dynamic model with a rich system of means-tested transfers where households make not only the standard decisions about consumption and savings but also decisions about family formation and program participation. The authors find in their model that lone mothers have large incentives to work, with low-productive ones receiving, on average, a participation subsidy amounting to 15 percent of their labor earnings.…”

“…My paper contributes to this literature and differentiates itself from the previously mentioned papers by explicitly framing a policy scenario of a reform toward a UBI as a departure from the status quo by a substitution of the IS system. In doing so, I follow Ortigueira and Siassi (2021) and Wellschmied (2021) and depart from the standard framework by modeling the IS system and the many brackets and kinks for the different means-testing requirements, with a careful treatment of the asset-testing component.…”

“…The income security system (IS) is composed of the Earned Income Tax Credit (EITC), other means-tested cash transfers such as the Suplemental Nutrition Assistance Program (SNAP) or the Temporary Assistance for Needy Families (TANF), and the Supplemental Security Income (SSI), available only when agents retire. I model the brackets and testing details of the EITC exactly as defined by the Internal Revenue Services (IRS) by following the formulations in Ortigueira and Siassi (2021), and I use a simplified way to model the SNAP and TANF programs for tractability purposes in a similar fashion to Wellschmied (2021). The SSI is modeled as defined by the US Social Security Administration (SSA).…”

“…In order to tackle this task, I numerically solve a dynamic general equilibrium model that is able to provide micro-founded life-cycle and budgetary implications of such a broad welfare state reform as well as a normative assessment that relies on rich dynamics and heterogeneity, taking into account the overall impact on inequality. With respect to the literature, this work is in the tradition of evaluating reforms and transfer programs in heterogeneous agents models (Berriel and Zilberman, 2012;Lopez-Daneri, 2016;Pashchenko and Porapakkarm, 2017;Hannusch, 2019;Daruich and Fernandez, 2020;Wellschmied, 2021;Ortigueira and Siassi, 2021;Guner et al, 2020Guner et al, , 2021Conesa et al, 2021;Ferreira et al, 2021;Mukbaniani, 2021) and is an addition on the quantitative macroeconomics side to a growing list of recent studies that focus on UBI policy (Jones and Marinescu, 2019;Hanna and Olken, 2018;Banerjee et al, 2019;Ghatak and Maniquet, 2019;Hoynes and Rothstein, 2019).…”

Social Transfers and Spatial Distortions

“…Finally, this paper is related to a number of model-based papers quantifying the distortionary effects of social transfer programs on labor supply, household formation, and human capital accumulation; and quantifying the resulting welfare consequences (see e.g., Greenwood, Guner, and Knowles (2000), Keane and Wolpin (2010), Chan (2013), Blundell et al (2016), Low et al (2018), Guner, Kaygusuz, and Ventura (2020), or Ortigueira and Siassi (2021)). In order to focus on the effects of social transfers on location choice, we abstract away from these margins in our paper.…”